Trade and QE2

The cavalcade of international whinging about QE2—the Federal Reserve’s effort to lower medium-term interest rates—is really telling and important to understand. The first thing to understand it, I think, is that QE2 is not primarily about international trade. The key thing about the United States and international trade is that the US economy is enormous. If Vermont, which is small, were a country then “international trade” would be really important to Vermont and “trade with the United States” in particular would be hugely important. But Vermont’s not a country. And because the US economy is so giant the volume of our trade with foreigners is small compared to what you see in most countries.

QE2 is about raising aggregate demand in the United States of America.

Now it is of course true that QE2 will have impact on other countries, and foreign policymakers should feel free to whine if they feel that America’s policy choices are inconveniencing them. But that doesn’t mean we should listen to them. In this regard I think it’s worth doing more than Kevin Drum does to distinguish Germany and China. The Germans are merely being hypocritical about this (that’s politics) but the Chinese are being nonsensical. Their problem with QE2 is that they’ve decided to subsidize politically powerful Chinese exporters by yoking their currency to ours in a way that leads them to import our monetary policy. Since they did that, they now want us to run a monetary policy that would be appropriate for China rather than a monetary policy that would be appropriate for the United States of America. But since the United States of America and China are very different places, economically speaking, it would be nuts of us to do this. Fortunately, China can unyoke itself from us any time it wants by letting its currency float more. They’re acting like this currency tether is something we’ve been begging them to do when in fact it’s something we’ve been begging them to stop.

This, by the way, is what drove me nuts about the proposals to hit China with tariffs unless they changed course. We don’t need to coerce or cajole them into changing course, we just need to steer our own ship correctly and not pay attention when they whine about it. They know what they have to do in response and sooner or later they will.